SEC Struggles With Surge of Investment Advisers

The number of registered investment advisers has increased so dramatically since 2004, the SEC said it is overwhelmed, understaffed and out of resources to keep up with exams to monitor their activities.

The SEC recently sought relief by asking Congress to give it more power to strengthen its investment adviser examination program, including assessing fees to fund exams, according to a new study from the commission.

Among the recommendations in its "Study on Enhancing Investment Adviser Examinations," the SEC is seeking to impose user fees on SEC-registered investment advisers to fund their exams by the Office of Compliance Inspections and Examinations.

The SEC has also asked Congress to authorize one or more self-regulatory organizations to examine, subject to the agency's oversight, all SEC-registered investment advisers and to authorize the Financial Industry Regulatory Authority to examine dual registrants, which are dually registered broker-dealers and investment advisers, for compliance with the Investment Advisers Act of 1940.

More staff and resources are needed given that the number of registered investment advisers has grown 38.5% from 8,581 advisers to 11,889 advisers from October 2004 to Sept. 30, 2010, the SEC said. Their assets under management have also increased during that same period from $24.1 trillion to $38.3 trillion.

"While the commission's resources and the number of OCIE staff may increase in the next several years, the number of OCIE staff is unlikely to keep pace with the growth of registered investment advisers," the report read. "The commission's examination program requires a source of funding that is adequate to permit the commission to meet the new challenges it faces and sufficiently stable to prevent adviser examination resources from periodically being outstripped by growth in the number of registered investment advisers."

Registered investment advisers and broker-dealers would be affected more so than credit unions, said Tim Halevan, chief compliance officer at CUNA Brokerage Services, a registered broker-dealer and investment adviser. It's still early in the process to say how the suggestions will shake up.

"Congress will have to have hearings. Quite frankly, it might end up being one of the recommendations or a combination. Some people are disappointed [the report] included the recommendations."

Halevan found it interesting that two of the five SEC commissioners wrote a dissenting opinion, saying that agency was not truly objective about the report.

Meanwhile, on July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, which mandated that the SEC conduct a study to review and analyze the need for enhanced examination and enforcement resources for investment advisers. The staff reviewed 30 letters from 25 interested parties about including investment advisers, broker-dealers, state regulators, an SRO and professional and trade associations. The staff also met with interested parties representing a range of perspectives.

The number of OCIE staff could increase in fiscal years 2011 through 2015. With respect to 2011, Obama has requested a fiscal-year funding level of $1.26 billion for the SEC, which represents an increase of approximately $139 million over the commission's 2010 fiscal-year funding level of $1.12 billion. In addition, the Dodd-Frank Act authorizes annual increases in the SEC's budget between 2011 and 2015, when $2.25 billion will be authorized.